Question

(20 marks = 5+10+5) Suppose that the assumptions of the Standard Trade Model apply. Consider three countries: X, Y and Z. Consider two goods: A and B. X and Y export A and import B. Z exports B and imports A. Moreover, suppose that country Y (which is a large country) experiences economic growth in its import sector. Explain in detail, using any relevant diagrams, what is the effect of this growth on the welfare of

(a) X?

(b) Y?

(c) Z?

Answer 1

Solution Since x and y important B, any impuct on chels import impoucts the other. Now since the important in country y increases, the entire demand curve for product B shifts that is the damand for product B increase overall. price f shift in demand carve original denved cuave pitan Quantity

Now as in the graph the demand carre shifts for product B, and thus for the same poice quanity demanded is more. This the poice of product B increases. Now for country x, the price of product increases. thus the import bill increases. And Hence, the overall fiscal deficit and current account depict of the Country increauses plus the increase in price leads to higher inflation thus overall the higher demand in country y has bad impact on the economy of country X. D